Global Ideas

EM “Haves” and “Have Not’s”

Those EM “have’s” with exposure to either falling commodities, current account issues, political turmoil, or all of the above, are taking down all EM countries, even those who do not have (“have not”) the same exposure to such factors.

Places like Mexico, Hungary, Poland, South Korea and the Philippines, do not deserve the drubbing they have been taking along with the asset class.

The real economy shift is not from EM to DM on an asset class basis but should be viewed more as a shift from the economies that can't defend themselves against the current factors to the countries that can (and in many cases may benefit).

Current account deficits and reliance on commodities, and/or political strife (caused by these factors) is not only taking down Brazil, Chile, Turkey, India, South Africa, Indonesia and Thailand, but they are driving a wedge within the EM asset class that investors cannot seem to overcome.

There is an opportunity here from the massive sell off in EM, but it won’t be for all.

Stronger external demand and supply chain linkages to strong regional exporters (Germany, Japan and to a lesser extent the US) should be seen in much of eastern Europe and parts of Asia. In Mexico, the US is a huge driver of the investment theme.

Fade the selloff in those countries who can benefit from:

Weaker commodity prices

Rates that should remain low

Inflation that IS low

Demand that is growing in the G3

A valuation gap in EM should exist if you are a country exposed to the named risks that plague some. If you are a country who may benefit from the positive factor bullet points, this is a time to pick countries and pick stocks.